Nothing PERSonal: We're all on hook for public retirement

If you're an average California public employee and your salary at retirement is $82,884, then your CalPERS pension is $60,894. Then throw in a Social Security benefit, and your income is about what it was before retirement. But not everyone is average. Over 12,000 PERS retirees receive a pension over $100,000, led by Bruce Malkenhorst at $530,000.

Malkenhorst is the poster child for a system rife with fraud and abuse. He simultaneously held six public jobs for the city of Vernon, and is awaiting trial for using city funds for "necessities" like golf and massages. But that doesn't stop him from abusing CalPERS and taxpayers.

The Little Hoover Commission that investigates state government operations recently found CalPERS is "dangerously underfunded." That's not easy when yearly contributions total $7.8 billion. You have to be dangerously incompetent to get into that position, but CalPERS has.

California's pension system started at the height of the Depression. The pensions were funded through state and local governments, employees and investment returns. Unfortunately, CalPERS' investment returns over the last five years earned only 0.10 percent.

The system was a model of competency until the late 1960s when the nation saw growth of public-sector union influence and an annual cost-of-living adjustment to state retirements was passed. Pension formulas were adjusted allowing for earlier retirement at much higher percentages, which is why a 50-year-old Fire Captain in Contra Costa County can retire on $250,000 per year.

As benefits increased, so did the need to pay for them. In 1966, CalPERS backed a ballot measure allowing 25 percent of its portfolio to be invested in the stock market. Unfortunately, the stock market went nowhere for the next 16 years. In 1984, Proposition 21 allowed stock investment to increase to 60 percent, just in time for the Crash of 1987. Being in the wrong place at the wrong time is the major reason California pension recipients are in trouble.

The CalPERS portfolio is made up of 50 percent stocks, 17 percent bonds, 14 percent private equity, 9 percent real estate, 4 percent cash, 4 percent inflation hedges, and 2 percent infrastructure. Buy and hold is the investment philosophy, so they suffered the stock market crashes of 2001 and 2007-9 and took a massive hit in the real estate crash. And their private equity managers underperformed their peers by half -- some of the managers may have been picked because of alleged bribes paid to Investment Committee members.

Another reason CalPERS investment returns are low is the makeup of the 13-member investment committee. Six are elected by government workers. The governor picks two and the Legislature picks one, rewarding political cronies with cushy jobs. The state Personnel Department picks two and two are elected officials, none of whom know anything about finance. Gov. Brown suggested adding two investment professionals but was rejected by the unions.

If CalPERS loses money, it's ultimately made up by the taxpayer. Even state employees are on the hook. Every household in the state is $30,000 in debt to CalPERS. You may not have to pay it now, but the piper is calling. A battle is raging between employees, state and local governments and taxpayers. Not everyone can win, but everyone can lose. The ultimate solution is future workers will be hired with the understanding they will be responsible for their own retirement through a 401(k) type arrangement, just like private sector employees.